KPR COLLEGE OF ARTS SCIENCE AND RESEARCH
COIMBATORE
LIABILITIES OF AN AUDITOR
Dr.R.Sangeetha
Assistant Professor
Liabilities of an Auditor
•A Chartered Accountant is associated with the valuable
profession.
•His primary duty is to present a report on the accounts and
statements submitted by him to members of the company.
•He is responsible not only to the members of the company but
also to the third parties of the company, i.e., creditors, bankers
etc.
Liabilities of an Auditor
Civil Liability
Liability for Negligence:
Negligence means breach of duty.
An auditor is an agent of the shareholders. He has to
perform his professional duties.
He should take reasonable care and skill in the
performance of his duties.
If he fails to do so, liability for negligence arises. An
auditor will be held liable if the client has suffered loss
due to his negligence.
It should be noted that an auditor will not be liable to
compensate the loss or damage if his negligence is not
proved.
Civil Liability
Liability for Misfeasance:
Misfeasance means breach of trust.
If an auditor does something wrongfully in the
performance of his duties resulting in a financial loss
to the company, he is guilty of misfeasance.
In such a case, the company can recover damages from
the auditor or from any officer for breach of trust or
misfeasance of the company.
Misfeasance proceedings can be initiated against the
auditor for any untrue statement in the prospectus or in
the event of winding up of the company.
Liabilities under Companies Act
Liability for Misstatements in the Prospectus
[Sec.35]
An auditor shall be held liable to compensate
every person who subscribes for any shares or
debentures of a company on the faith of the
prospectus containing an untrue statement made
by him as an expert.
The auditor shall be liable to compensate him
for any loss or damages sustained by him by
reason of any untrue statement included therein.
Liabilities under Companies Act
Criminal Liability of Auditor under
Companies Act:
Criminal Liability under Indian Penal
Code
If any person issues or signs any
certificate relating to any fact which such
certificate is false, he is punishable as if
he gave false evidence.
According to Sec.197 of the Indian Penal
Code, the auditor is similarly liable for
falsification of any books, materials,
papers that belongs to the company.
Liability under Income Tax Act
[Sec.278]
For tax evasion exceeds ₹.1,00,000, rigorous imprisonment of six
months to seven years.
A person who induces another person to make and deliver to the
Income Tax authorities a false account, statement or declaration
relating to any income chargeable to tax which he knows to be
false, he shall be liable to fine and imprisonment of three months
to three years. An auditor may also be charged in case of wrong
certification of account.
A Chartered Accountant can represent his clients before the
Income Tax Authorities. However, if he is guilty of misconduct he
can be disqualified from practicing.
An auditor can face imprisonment up to two years for furnishing
false information.
Liability for Professional Misconduct
The Chartered Accountant Act, 1949
mentions number of acts and omissions
that comprise professional misconduct in
relation to audit practice.
The council of ICAI may remove the
auditor’s name for five years or more, if
he finds guilty of professional
misconduct.
Liability towards Third Parties
There are number of persons who rely
upon the financial statements audited by
the auditor and enter into transactions
with the company without further enquiry
viz. creditors, bankers, tax authorities,
prospective shareholders, etc.
Liability for Negligence
Ithas been held in the court that auditor is
not liable to third parties, as there is no
contract between auditor and third parties.
He owes no duty towards them.
Liability for Frauds
The third parties can hold the auditor liable,
if there is fraud on the part of auditor even if
there is no contractual relationship between
auditor and third parties.
In certain cases negligence of auditor may
amount to fraud for which he may be held
liable to third parties.
But it must be proved that auditor did not
act honestly and he knew about it.
Audit Report
Audit report is the final stage of audit
process. The results of the audit are
communicated through audit report.
Audit report is the written opinion of an
auditor regarding companies financial
statements.
Audit report is a document prepared by an
auditor to certify the financial position
and accounting records of a firm.
Meaning of Audit Report
Audit report is the statement included in the
financial statements.
It contains the opinion of the auditor in financial
statements.
The auditor reports to the shareholders who have
appointed him.
He has to provide his opinion on the truth and
fairness of financial statements.
Thus, the auditor protects the interest of
shareholders through audit report.
Definition of Audit Report
Lancaster has defined a report as “a report
is a statement of collected and considered
facts, so drawn up as to give clear and
concise information to persons who are not
already in possession of the full facts of
subject matter of the report.”
According to Cambridge Business English
Dictionary, Audit report is defined as a
formal document that states an auditor’s
judgment of a company’s accounts.
Form of Audit Report
